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Working Paper
On the welfare properties of fractional reserve banking
Supersedes Working Paper 13-32/R. Monetary economists have long recognized a tension between the benefits of fractional reserve banking, such as the ability to undertake more profitable (long-term) investment opportunities, and the difficulties associated with it, such as the risk of in-solvency for each bank and the associated losses to bank liability holders. I show that a specific banking arrangement (a joint-liability scheme) provides an effective mechanism for ensuring the ex-post transfer of reserves from liquid banks to illiquid banks, so it is possible to select a socially efficient ...